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Evaluating Trump’s First Trade Deal with China

There is nothing special in the “100-day Action Plan.” On balance, the consensus favors the opening of China to American business. It will, of course, depend on careful monitoring to insure that the door is swinging the right way. China has a bad record of fulfilling its obligations, especially when there is any wiggle room. The accords should be seen as a “testing the waters” exercise to see if Beijing has gotten the message that trade must be more balanced and that the Trump Administration is serious about changing trade policy to halt the economic hemorrhaging of U.S. industry.

By William R. Hawkins l May 31, 2017

International trade was a major campaign issue for Donald Trump.

He rejected “free trade” as the intellectual cover for agreements that allowed the massive outsourcing of American jobs overseas, the closing of factories across the U.S., the growth of staggering trade deficits in goods ($734 billion last year) and the transfer of wealth and technology to foreign rivals. This was arguably the most important factor in his upset victory. It was the issue of creating (or recovering) well-paying jobs— not email scandals or mud-slinging, that gave Trump what he needed to “break the Blue Wall” in the Midwest that Hillary Clinton had counted on to secure an Electoral College majority.

Coming into office, President Trump discarded the 12-nation Trans-Pacific Partnership agreement that President Barack Obama had signed (but Congress had not approved). He demanded that the North American Free Trade Agreement (NAFTA) be renegotiated and on May 18 sent a letter to Congress setting that in motion. He created a new Office of Trade and Manufacturing Policy headed by economist Peter Navarro, who has long warned of how China’s economic gains have given Beijing the power to challenge the U.S. in global politics. When President Trump signed his “Buy American, Hire American” executive order on April 18 at the Snap-On Tool plant in Iowa, he stated, “We’ve lost 70,000 factories since China joined the World Trade Organization. And you’ve seen that and you’ve heard about it – 70,000. The World Trade Organization – another one of our disasters. But this election, the American people voted to end the theft of American prosperity. They voted to bring back their jobs – and to bring back their dreams into our country.”

When Vice-President Mike Pence swore in Robert Lighthizer as U.S. Trade Representative on May 15, he said, “In choosing Robert Lighthizer as the U.S. Trade Representative, President Trump is keeping his promise to put America first. …For the past 30 years, Robert has represented the American businesses that are the beating heart of our economy as a trade litigator. From manufacturing to agriculture, high-tech to financial services, Robert Lighthizer has distinguished himself as a tireless defender of America’s workers and America’s future, and now he’ll be doing it for the United States of America.” In a break from militant partisanship, the Senate confirmed Lighthizer 82-14, with his harshest critics being “free trade” Republicans like Sen. John McCain (AZ) and libertarian Sen. Ben Sasse (NE). Lighthizer has in the past opposed those who “embrace unbridled free trade, even as it helps China become a superpower.”

President Trump did not, however, label the People’s Republic of China a currency manipulator as he had promised. Such a declaration would have allowed the imposition of comprehensive countervailing duties to close what is the largest element in America’s unbalanced trade accounts; the goods deficit with China which was $347 billion in 2016 and which has sent over $3 trillion to Beijing over the last decade. Trump, however, implied he was holding off on the currency issue because of needing to enlist Beijing’s help in restraining North Korea. But if China fails to head off the nuclear threat from Pyongyang, the issue could be revisited this summer.

Thus, it was a surprise when President Trump made his first trade agreement with Beijing, announced on May 11. It was negotiated under the 100-Day Action Plan of the U.S. – China Comprehensive Economic Dialogue which had been established during the Mar-a-Lago summit with Chinese President Xi Jinping. Is this a “flip-flop” in trade policy? Or is it in line with Trump’s campaign manifesto where he said he would “cut a better deal with China that helps American businesses and workers compete?” As always, the devil is in the details.

What the Commerce Department called a “consensus” rather than an “agreement” touched on several major sectors; agriculture, financial services, investment, and energy, but in very minor, even tentative ways. China is to allow imports of U.S. beef on “conditions consistent with international food safety and animal health standards.” China has been blocking American beef supposedly out of fear of “mad cow” disease. Blocking U.S. food exports, whether animal or grains, is a long tradition in both Europe and Asia dating back to the 19th century. American farmers and ranchers are the most productive in the world and pose a threat to the “food security” of countries who want to protect their agricultural sectors. Claiming a health hazard from imports can be valid given the sad state of practice and regulation in many parts of the world, but they are not on sound ground when used against American food products. There are more health worries about the quid pro quo of allowing imports of cooked poultry from China.

The U.S. demand that any health restrictions on imports be based on objective standards was also reflected in reaching the consensus that “China’s National Biosafety Committee (NBC) is to hold a meeting by the end of May 2017, to conduct science-based evaluations of all eight pending U.S. biotechnology product applications to assess the safety of the products for their intended use.” The outcome of these evaluations is not, however, mandated.

China is put on the same basis as other countries in their ability to import liquefied national gas (LNG). Beijing needs to import energy and expanding American supplies of LNG need buyers. It is a market opening measure that supports a vital American industry, while giving Washington another lever on China – a potential item to sanction.

The consensus also opens the door (slightly) to U.S. financial institutions to operate in China. By July, Beijing is to allow American credit rating services to operate and to come up with guidelines that would allow U.S.-owned suppliers of electronic payment services to begin the licensing process. “This should lead to full and prompt market access,” claims Commerce. On the other side of the ledger, Chinese banks are assured that they will have the same regulations applied to them as to other foreign banks in the U.S.

Some critics of these accords have complained that they are executive agreements without any dispute settlement mechanism or WTO involvement. How will they be enforced they ask? The answer is: they can be enforced much more easily and quickly by executive action than by any quasi-legalistic process like those placed in previous agreements. The WTO is particularly problematic, being more of an obstacle than an aid to enforcement. Taking a case to the WTO means placing the dispute in front of foreign judges to rule on a matter of American national concern. As President George W. Bush said in regard to the UN applies with equal force to the WTO, “We don’t need a permission slip” to protect ourselves. The U.S. has the sovereign right to take counter action against China (or any other trading partner) if outcomes do not favor America.

These first accords will not do much to reduce the trade imbalance with China nor address the larger issues in the contentious relationship with Beijing. And these issues are so large that even such a “free trade” radical as Daniel Ikenson of the libertarian Cato Institute has noted Beijing’s unfair practices; including massive subsidization of industries, relatively high tariffs on goods imports and barriers to foreign services, forced technology transfers, policies that grant preferences to companies that innovate in China, insufficient protection of foreign intellectual property rights, barriers to digital trade including web filtering and blocking, and the continued prominence of state-owned enterprises. Yet, he still defends trade with China and fears a “devastating trade war.” Ikenson prefers appeasement and laments that “Today, our economic frictions are viewed through the prism of our geopolitical differences.” He considers Great Power rivalry to be merely a “distraction” from doing business. His extremely inverted priorities appear ignorant of the role that comparative economic capabilities play in determining the balance of power. This is most notable in Ikenson’s criticism of the U.S. for restricting the Chinese acquisition of American firms on national security grounds (particularly those involved in high-tech work). He also complains that President Trump is a “nationalist,” as if President Xi is not.

In short, there is nothing special in the “100-day Action Plan.” On balance, the consensus favors the opening of China to American business. It will, of course, depend on careful monitoring to insure that the door is swinging the right way. China has a bad record of fulfilling its obligations, especially when there is any wiggle room. The accords should be seen as a “testing the waters” exercise to see if Beijing has gotten the message that trade must be more balanced and that the Trump Administration is serious about changing trade policy to halt the economic hemorrhaging of U.S. industry.

William R. Hawkins, a former economics professor and Congressional staffer, is a consultant specializing in international economics and national security issues. He is a contributor to SFPPR News & Analysis, of the Conservative-Online-Journalism center at the Washington-based Selous Foundation for Public Policy Research.